Yesterday, Thomas Piketty and his colleagues released a sweeping report surveying the extent of global and national economic inequality. Charles Dickens would be inspired – Ebenezer Scrooge’s third ghost portending a landscape of poverty, grief, and desolation has nothing on the French economist. Like Jacob Marley’s specter, these economists show a grim future for a critical reason: it does not have to happen. Although there are many causes of the strong currents driving America’s wealthiest households far from the many more struggling beneath them, monetary and financial policy play a significant, widely-overlooked or even rejected role. The Federal Reserve must, like Scrooge, look ahead, take heed, and change.
We feel so strongly about this issue that FedFin has launched a new Economic Equality blog, posting on it recent papers, analyses, and policy conclusions showing how U.S. monetary and financial policy inadvertently but meaningfully exacerbates the income and wealth divide. We will shortly post an in-depth assessment of Piketty’s new equality-data analysis, but we just today posted an assessment of new Fed research showing how reduced bank balance-sheet capacity leads to unemployment. This is a conclusion validated by prior research that is not only critical to equality policy, but also to answering the Fed’s conundrum: why has so much accommodative policy done so little to spur genuinely full employment and wage growth. Think employment is full? See other posts on our blog here and here.
In recent hearings, Chair Yellen and soon-to-be Chairman Powell have strongly countered assertions that Fed policy plays any role in economic equality. Fiscal policy is the culprit they usually cite – and no wonder given not just current policy, but that likely to come soon on taxes, entitlements, and other transfer payments that could play a critical equality-levelling role but now drive the equality divide still farther apart. But that a problem is other people’s fault does not obviate one’s own role also in it. That there are other causes of economic inequality does not absolve the Fed.
Appalled by his ghost’s revelations, Scrooge emphatically rejected any notion that suffering was his responsibility, doing so fervently even when shown the family he employed shivering in a cold, meager effort to celebrate the holiday. Scrooge was right in that the world Charles Dickens portrays in Bleak House and so many other masterpieces wasn’t the fault of any single policy or person. Economists, historians, and statesmen then and now have reckoned with broader macroeconomic, imperial, technological, and agricultural causes that were and in many cases still are potent enemies of widespread prosperity. But huge problems notwithstanding, Dickens’ ghost was right: the sad prospect of Tiny Tim and the Cratchit family was indeed Scrooge’s fault, a fault he could and, upon his epiphany, did remedy.
Because economic inequality is economic in its nature and money and the incentives that move it lie at the heart of economics, the Federal Reserve in fact plays a critical role, one recently acknowledged by a global central banker who said in passing that monetary policy is “overtly distributional.” Indeed it is. Throw in equally well-intentioned but also distributional financial regulation, and a critical cause of current inequality is clearly revealed.
In 2018, we’ll do our best to show in detailed analyses the specifics of each policy and how it works through the economic-equality causal chain-link fence. Our goal is simple: show the Fed and other U.S. policy-makers how their focus on their own objectives has done significant, but inadvertent damage to equality. From this, we hope will come epiphanies that recalibrate policy and make a meaningful equality difference. Financial-policy remedies are not enough, but they’re an important New Year’s resolution.